If you keep an eye on the global financial market, you will observe that 20 countries have eased their economy policies by cutting interest rates in the first 2 months of 2015. This does not include Australia which cut its interest rate twice (Feb 2015 and May 2015) and New Zealand which cut its interest rate this month.
A currency should fall when a rate cut devalues it, as the rate cut makes it cheaper for banks to lend, and for borrowers to borrow. The following shows the movement of NZD:USD right after the rate cut was announced:
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Now, for the case of AUD when the second rate cut came in May 2015. Research analysts have forecast a rate cut on May 2015. It was almost a certainty that a rate cut would be announced after the board meeting. The movement of AUD:USD right after the announcement went like this:
(Note: RBA = Reserve Bank of Australia)
This rate cut has not come as a surprise. Everybody knows it. Because of this AUD rises despite of RBA's rate cut. The reason was that the effects have already been "adsorbed" and "digested" by the market sentiment. If you read the news before the rate cut announcement and went to short AUD:USD, then you will become "water fish". When it is something that everybody knows, it just wouldn't go the way it was expected to be going.
Both cases have the same rate cut decisions, yet completely different reactions. Why? The difference lies in whether the news has been made known to the public in advanced. In NZ, it came as a surprise. In AU, it was expected. If you tried to make money based on news that everybody knows, you aren't going to get it.
[to be continued]
